On May 6, Arconic Inc.’s (ARNC) insiders disclosed the purchase of $1.6 million of stock as the aluminum-parts maker announced additional share buybacks and clarified plans for a spinoff.

Chairman and CEO John Plant bought 50,000 shares of ARNC at $22.14. Since March 5, Plant has been on a buying spree, purchasing over $5 million of Arconic stock at an average price of $19.27. The buying has increased Plant’s holdings by 649%, to 298,000 shares.

Joining Plant in the May 2 buying was directer Rajiv Gupta who took down $499,447 worth of ARNC at $22.10. Gupta is Chairman of Aptiv Plc. (APTV). The purchase increases Gupta’s ARNC holdings by 143% to 38,420 shares. Though he’s been a Arconic director since 2016, Gupta had not bought any ARNC stock until this purchase.

Arconic insiders’ recent purchases came as the company announced a $200 million accelerated share repurchase agreement, or ASR, with JPMorgan Chase Bank. This is in addition to a $700 million ASR announced on Feb. 19. $100 million remains under a buyback authorization by the Board of Directors through the end of 2020.

In an ASR, a company enters a forward sale agreement with an investment bank and pays cash upfront. Then the investment bank borrows the shares from clients or share lenders and delivers the shares to the company, immediately reducing the shares outstanding.

Insiders often “cash-out” as their stock spikes after buyback announcements

It’s rare for insiders to purchase shares in conjunction with share buyback announcements. More typically, corporate insiders “cash-out” of holdings as the share price rises after a repurchase announcement.

The practice has caught the attention of the SEC. In a June 11, 2018 speech SEC Commissioner Robert J. Jackson Jr. addressed the issue:

“… studying 385 buybacks over the last fifteen months. We matched those buybacks by hand to information on executive stock sales available in SEC filings. First, we found that a buyback announcement leads to a big jump in stock price: in the 30 days after the announcements we studied, firms enjoy abnormal returns of more than 2.5%. That’s unsurprising: when a public company in the United States announces that it thinks the stock is cheap, investors bid up its price.

What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement. In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.”

The SEC commissioner would be pleased that Arconic insiders’ buying is aggressively aligned with that company’s buyback programs.

The Arconic insiders bought following a positive Q1 earnings report and clarification of an upcoming spinoff

The Arconic insider purchases and second round of accelerated stock buybacks come on the heels of an upbeat Q1 earnings report and more information about an upcoming “separation” of the company. On April 30, Arconic Reported Q1 revenue of $3.5B, beating the consensus of $3.53B. The company raised EPS guidance from 46c-51c vs a consensus of 44c.

Here’s what CEO Plant had to say about Q1:

“In the first quarter 2019, the Arconic team improved revenue, expanded margins, improved adjusted free cash flow year over year, and delivered the highest quarterly adjusted operating income, adjusted earnings per share and RONA since 2016 separation. We expect this positive trend to continue in the second quarter. As plans for separation move forward, we are also acting swiftly to reduce costs to be in line with industry leading peers and are targeting the sale of certain businesses that are non-core to either of the future entities. These actions will help drive the margin performance of the company.”

Arconic became a pubic company in 2016 as Alcoa Inc. split into two businesses. However, the spinoff company retained the Alcoa name and ticker (AA), while the parent was renamed Arconic, Inc. This caused confusion among investors, and likely contributed to the stock’s poor performance.

And though ARNC stock is essentially unchanged since its split with Alcoa, there’s has been no shortage of volatility and drama, including a proxy battle with shareholder Elliott Management Corp., multiple CEO changes and a connection to a famously deadly apartment fire in London.

Arconic Inc. (ARNC) since 2016. Source: Interactive Brokers

Paul Singer’s Elliott Management failed to broker a deal to take Arconic private

In January 2019, Arconic rejected a $10.6 billion buyout by Apollo Management. Paul Singer of Elliott Managementput the deal together. Prior to the failed deal, the activist had suggested Arconic’s proper valuation was between $33 and $54 per share. Notably, Elliott still owns 11.5% of ARNC as of Q4 2018, at a cost of about $25.89, according WhaleWisdom.com.

After the failed buyout, the company replaced CEO Klaus Kleinfield with then-Chairman John Plant and announced yet another spinoff. Arconic will separate into two companies: one focused on parts making and another on the production of aluminum sheets. From the company’s April 30 press release:

Global Rolled Products will comprise rolled aluminum products and aluminum extrusions. The Engineered Products & Forgings business will include engine components, fastening systems and engineered structures. The businesses of the current Transportation and Construction Solutions segment will be divided. The Building and Construction Systems business will be retained and included in Global Rolled Products, and forged aluminum wheels will become part of Engineered Products & Forgings.

The Company is targeting completion of the separation in the second quarter 2020.

Goldman Sachs analyst: Arconic has gone a long way toward providing “strategic clarity.”

After the earnings release, Goldman Sachs analyst Matthew Korn upgraded Arconic to Buy from Neutral. The analyst also raised his price target for the shares to $26 from $21. Positives Korn sees: An increase in Arconic’s full-year earnings and free cash flow outlook, an accelerated cost savings goal, margin expansion targets, an earnings confidence interval for Boeing 737 MAX build rate uncertainty, and a timeline for the company’s planned split into two entities next year. The analyst believes Arconic has gone a long way toward providing “strategic clarity.”

Arconic’s insider buying, combined with the accelerated share repurchases, suggests management is committed to maximizing shareholder value. And given the largest shareholder is activist Elliott Management, things are getting interesting at Arconic Inc.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.

Mark Gaffney is an investor and money manager with over two decades experience analyzing and profiting from the SEC filings of "Whales" -- elite managers and corporate insiders with superior information.
mark@gaffneycapital.com